The foundation for successful trading is information. Information drives analysis and analysis leads to insight. Over the next two deep dives, we will provide a complete rundown on the best sources of information for the agricultural commodity trader along with some tools and techniques to start converting information into effective trading strategies. This month’s edition focuses on Supply Side inputs.
In the 1983 movie Trading Places, in addition to disrupting the life of their nephew over a nature-versus-nurture inspired bet, the scheming Duke brothers conspire to steal a crop report and use that ill-gotten information to corner the market for Frozen Concentrated Orange Juice.
And while the fictional Duke & Duke Commodities never existed and the FCOJ futures market traded its last open-outcry contract in 2012, the pursuit of insight into supply and demand reports is real and as critical to markets today as it was to the plot of the classic comedy. Fortunately, market insight can be gained, not with elaborate schemes, but from an understanding and applied use of the multiple public resources available to today’s commodity trader.
For stock market traders, the companies themselves are the primary source of information. Listed firms must follow government-regulated reporting requirements. Companies publish audited results, provide forward-looking guidance, host shareholder and analyst calls and more, all intended to inform current and potential investors. Click the “For Investors” tab on any major listed company’s website and you get straight to the source.
Unfortunately, corn stalks and cotton bolls don’t put out press releases, so market participants need an external source to serve as a primary data base. For most of the exchange-traded commodities, the U.S. Department of Agriculture is that source. Established in 1862 under President Abraham Lincoln, the USDA has multiple sub-agencies within the department devoted to the production and maintenance of key agricultural market data. Each sub-agency has a slightly different orientation and approach, but collectively the USDA system represents the go-to resource for market participants.
To begin understanding the abundance of public data, it is helpful to create a framework to categorize the reports available. An initial categorization separates reports into ‘Supply’ or ‘Demand’ focused, then looks at the timing and tenor of the information. A final consideration can be given to the source and context of the report. With this framework in place, the foundation to convert information into analysis and insight can ensue.
Before looking further at these categories and information within each, a point of clarification. Unlike financial reporting which typically follows a calendar year or company-designated fiscal year, agricultural data is organized by crop year. By convention, the crop year begins at the onset of harvest of a crop and concludes 12 months later. For most North American crops that means a late summer or early autumn beginning and a middle-to-late summer ending. While the actual timing of harvest will differ from year to year, a standard crop year convention is always applied. In most citations, the crop year references both of the calendar years it spans – e.g. 2023/24 designating the harvest period beginning in autumn 2023 and the ensuing 12 months. In cases where only a single year is given (e.g. 2023), it can be assumed the reference is to the relevant harvest period.
Because Northern Hemisphere crops historically comprised most of global production, the same timing is still applied to Southern Hemisphere crops, even though their physical production cycle is out of phase by six months. The Southern Hemisphere crops are slotted into the global crop year that corresponds most closely with their harvest period. For Brazilian soy, as an example, the physical window for harvest begins in April or May – six months off from the Northern Hemisphere harvest in September and October. That production will be grouped into the 23/24 crop year. The table below spells out the crop-year conventions for the major traded commodities. In some instances, the term ‘marketing year’ is used in place of crop year in the context of a world trade or demand orientation.
Supply – Crop Area
Crop production is the key driver of supply. Production is a function of the area devoted to growing a particular crop. Getting a read on production begins with estimating area. While the crop year begins with harvest, the growing season begins with seeding, so forecasting area is done well in advance of the crop year itself.